Paper Number
ICIS2025-2330
Paper Type
Complete
Abstract
To reduce return friction in online shopping, many e-commerce platforms now allow consumers to receive a full refund without returning the product. While this refund-only policy enhances the consumer experience, it also raises concerns about unintended impact on retailer profitability. We develop a game-theoretic model under information asymmetry to examine the welfare implications of the refund-only policy and characterize when platforms should adopt it. Our analysis reveals a unique downside of the standard free-return policy: it creates a trade-off between the value-based screening and quality-revealing roles of pricing, prompting high-quality retailers to distort prices as a costly signal and suboptimally exclude low-valuation consumers. A platform should adopt the refund-only policy to correct this distortion, thereby improving pricing efficiency and achieving a Pareto improvement. Our findings also offer guidance on tailoring refund leniency based on product category characteristics and shipping costs.
Recommended Citation
Zhao, Jiawei; Wang, Yun; Hou, Liwen; and Xue, Ling, "Should A Platform Adopt the Refund-Only Policy?" (2025). ICIS 2025 Proceedings. 21.
https://aisel.aisnet.org/icis2025/sharing_econ/sharing_econ/21
Should A Platform Adopt the Refund-Only Policy?
To reduce return friction in online shopping, many e-commerce platforms now allow consumers to receive a full refund without returning the product. While this refund-only policy enhances the consumer experience, it also raises concerns about unintended impact on retailer profitability. We develop a game-theoretic model under information asymmetry to examine the welfare implications of the refund-only policy and characterize when platforms should adopt it. Our analysis reveals a unique downside of the standard free-return policy: it creates a trade-off between the value-based screening and quality-revealing roles of pricing, prompting high-quality retailers to distort prices as a costly signal and suboptimally exclude low-valuation consumers. A platform should adopt the refund-only policy to correct this distortion, thereby improving pricing efficiency and achieving a Pareto improvement. Our findings also offer guidance on tailoring refund leniency based on product category characteristics and shipping costs.
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19-SharingEconomy